The present invention generally relates to brokerage systems and methods, and more particularly, to the electronic trading of fmancial instruments such as derivatives.
In recent years, commodity exchanges have become more and more dependent upon electronic trading systems. The older manual methods by which trades were conducted have given way to advanced computer systems that have generally mimicked the manual methods of old. These relatively new electronic trading systems have many advantages over the manual systems, including the ability to provide such features as greater accuracy, reduced labor cost, real time market information, more efficient communications over greater distances, and automated record keeping. However, because the markets in which these commodities are being traded are so vastly different from the descriptions of the instruments to the transaction methodologies, electronic trading systems are generally limited to a specific market such as futures, cash, oil, stock, securities, etc., and sometimes even to a specific commodity within a single market.
An example of one such automated trading system designed for the anonymous trading of foreign currencies is described in U.S. Pat. Nos. 5,077,665 and 5,136,501, both issued to Silverman et al. and assigned to Reuters Limited of London. In the Silverman et al. system, a single central host computer maintains a central database that may consist of the trading instruments available for trade, credit information, and various bids and offers that are present throughout the system. The host computer may then use this information to match active bids and offers based on matching criteria which may include the gross counterparty credit limit between counterparties to a potential matching transaction, price, and available quantity. To that end, each client site may establish, and may subsequently vary or reset, a credit limit for each possible counterparty. The credit limits may be used by the host computer to establish the gross counterparty credit limit for each possible pair of parties and which may be equal to the minimum of the remaining credit (i.e., initial credit limit less any applicable transactions that have already been executed) from a first party to a second party and from the second party to the first party. The host computer may block completion of an otherwise eligible matching transaction between a given pair of potential counterparties when the transaction has an associated value in excess of the applicable gross credit limit. In the Silverman et al. system, the various client site computers (also referred to as keystations) merely maintain and display a restricted subset of the information available at the host computer such as a predetermined number of the best bids and offers, and communicate credit and other transaction orientated information to the host computer for execution. However, in an attempt to preserve the anonymity of the parties, the client sites may not have access to the credit limits set by their possible counterparties, or even to the identification of any other party to a particular transaction until after a transaction has been completed.
Thus, in the Silverman et al. system, confidential counterparty credit limit data is apparently maintained and utilized as part of the trade matching process by the central host computer. As a consequence, each client site may not have the ability to determine, prior to committing to buy or sell at a displayed price from one or more anonymous counterparties, whether it is in fact eligible to respond to any of the bids or offers currently being displayed. Further, the credit limit appears to be merely a cap value (or credit line) on the amount of trading one party will enter into with another party. It has little to no relationship to the credit risk the other party represents since the financial commitment associated with the fmancial instruments traded with this system ends at the consummation of the underlying contract. Thus, a cap value may be sufficient in this particular circumstance The central host computer may not utilize the credit information until after a match has been found between counterparties to determine if the counterparties have sufficient credit with one another to execute the trade.
Consequently, unless a trader attempts to execute a trade at the best price currently displayed on the trader""s screen, the trader using one of the anonymous matching systems may not know whether the trader has credit with, and is willing to extend credit to, the anonymous counterparty offering (i.e., bidding) the best price currently displayed on the trader""s screen. Thus, the trader does not know whether any attempt to buy or sell at the displayed price may be subsequently invalidated by the system for lack of such credit. The Silverman et al. system also fails to provide for dialogue between the parties, much less anonymous dialogue which may facilitate the execution of a trade that might otherwise not occur.
Reuters Limited has apparently expanded the system described in Silverman et al. to include Forward Foreign Exchange contracts which are derivative instruments. However, as opposed to offering a settlement risk system that enables credit analysis prior to face-to-face settlement, the Reuters Limited system introduces the concept of soft matching which makes trades on the basis of credit risk rather than settlement risk. Thus, a trade is not confirmed until both parties obtain subsequent credit approval. Either party can cancel the transaction under the guise of no credit available to the counterparty once they know who is the counterparty. Accordingly, the Reuters Limited system is reportedly an unpopular solution to derivative trading via an electronic trading system.
Another automated trading system is disclosed in U.S. Pat. No. 5,375,055 issued to Togher et al. and assigned to Foreign Exchange Transaction Services, Inc. The Togher et al. system is an anonymous trading system which may identify the best bids and offers from those counterparties with which each client site is currently eligible to deal, while maintaining the anonymity of the potential counterparty and the confidentiality of any specific credit limitations imposed by the anonymous potential counterparty. This system is apparently designed to run as a closed system, with dedicated desktop terminals connected to various local computer centers, which are in turn connected to regional computers.
In the Togher et al. system, each client site may only be able to view one foreign currency at a time per screen The Togher et al. system is further limited by the fact that each client site may provide the system with only limited credit information for each potential counterparty (for example, a one bit flag indicating whether a predetermined limit has already been exceeded), and by the fact that each bid or offer for a particular type of fmancial instrument is apparently prescreened by the system for compatibility with that limited credit information before calculating an anonymous dealable price for presentation to the traders dealing with that particular fmancial instrument. The prescreening in Togher et al. is a simple check to determine whether any credit remains between the two counterparties to the potential transaction, and thus may be performed using a simple yes/no preauthorization matrix.
The preauthorization matrixes may be maintained at each of the several regional nodes (also referred to as distributed nodes) of a distributed processing communication network, with each such regional node being connected by corresponding individual links of the communications network to the respective client sites for which it is responsible for distributing market information including customized dealable bid and offer prices, and global best prices.
The sensitive credit limit data indicating how much credit a particular client site is willing to extend to each possible counterparty is preferably maintained at an access node associated with that particular client, and a simple yes/no indication of whether the entity (for example, a trader, a trading floor, or a bank) associated with that particular client site is willing to transact business with a particular counterparty is transmitted to the other nodes of the communications network.
To further limit the data received and processed by each of the relevant regional node computers (i.e., the regional nodes closest to the particular client site and/or closest to the particular counterparty), merely the changes in the credit state between a particular client site and a particular counterparty (i.e., that credit is no longer available or credit is now available) may be transmitted to the distribution nodes, and any credit state information relevant to transactions between two client sites both associated with other distribution nodes may be altogether ignored.
In the Togher et al. system, if either of the two applicable credit limits has not previously been exceeded between a particular pair of counterparties, then the system displays the entire bid or offer as a dealable transaction, but apparently permits each client site to block any above-limit portion of any resultant buy or sell transaction during a subsequent deal execution/verification process. This may, however, add additional time consuming steps for the users of the Togher et al. system. Alternatively, possibly at the option of the party by or for whom the low limit has been set, the entire transaction may be blocked. As a second alternative, a preauthorization matrix may indicate whether sufficient credit remains to execute a predetermined standard deal amount in addition to, or instead of, a mere indication as to whether any credit from a particular potential counterparty had already been used up. In such an alternate embodiment of the Togher et al. system, it might also be possible to display to each trader two dealable prices: one at which at least the predetermined standard amount is available, and a second one at which only a small amount may be available. Thus, individual orders are not independently treated, and the user may not have the ability to look through the bids and offers and deal at a worst price, if the user so chooses because of a difference in counterparties credit qualities.
In accordance with another aspect of the Togher et al. system, at least a first trader having an open quote that is displayable as the best dealable or regular dealable quote at any of the other trading floors is automatically alerted that their bid (offer) quotation is the best price available to at least one potential counterparty with whom mutual credit exists, and thus could be hit (taken) at any time. Similarly, at least if the quoter""s bid (offer) quote is not currently the best with at least one trading floor but is thus subject to immediately being hit (taken) by a trader at that trading floor, then the quoter is preferably also alerted if his/her quote is joined (i.e., equal to in price, but later in time) to such a best dealable or regular dealable price from another trading floor. In other words, in the Togher et al. system, the auto-matching process does not enable the active trader to select a price other than the best price to trade. This may force the trader to accept what the system offers, even if the trader would prefer a different counterparty for credit reasons. In addition, the Togher et al. system does not show the trader the total depth of the market, only those prices which are dealable, and thus, may fail to give the trader a complete picture of the market. The trader is also limited to the quantity stated. No provision is made for the modification or negotiation of the quantity or other terms of the trade.
The systems described above are such that they focus on overnight settlement risk. These systems are apparently incapable of dealing with the actual credit requirements of a variety of different individual financial instruments simultaneously, or a counterparty""s long-term ability to meet these requirements. As a result, these systems generally have only been deployed in the markets where settlement takes place in a few days of the transaction, and there are no continuous and ongoing credit requirements or obligations between the counterparties. Specifically, as a result of these limitations, these designs may not be able to support the anonymous trading of financial instruments such as interest rate swaps, caps and many other financial products. They may be unable to accommodate these more complex financial instruments because, among other things, these systems apparently treat all financial instruments alike, and therefore, may be incapable of handling more complex financial instruments which require a determination about the financial strength of the opposing counterparties. Trades conducted with some financial instruments such as derivatives create multi-year financial commitments, and therefore, mere credit limit or credit cap systems are insufficient in measuring and managing an institution""s credit risk.
Accordingly, it is noted that no known system is designed to operate with derivative products such as interest rate swaps, caps, floors, forward rate agreements (FRA), interest rate basis swaps, interest rate options, foreign exchange, switches, or any other over the counter derivative instruments. Derivatives are considered by many to be too complex to be efficiently handled within an electronic trading system. Specifically, derivative products are typically define by certain terms and conditions, and the different types of derivatives products are defined by different sets of terms and conditions. For example, an FRA is generally defined by a start time, an end time, an over date, and a floating rate option, while an interest rate swap is generally defined by a start time, an end time, an over date, a floating rate option, a frequency of the fixed coupons, a basis, and a special rule(s) as applicable with some currencies. Accordingly, the variances in the specific information necessary to adequately define the different derivative products has apparently been a deterrence to the development of an electronic derivatives trading system.
Yet another deficiency of the prior art systems is the inability to automatically determine one""s position (i.e., credit risk position), and the inability to identify possible counterparties with offsetting positions for initiating a transaction. No know electronic trading system has been able to provide this information on a real-time basis. This strikes to the essence of the derivatives market which is based upon large fmancial institutions being able to manage their credit risk and market risk on a daily basis.
Thus, a heretofore unsatisfied need exist in the industry for an automated system for distributing anonymous price and position information via a customized financial instrument symbology that enables traders to effectuate credit-based trades of complex instruments such as those in the derivatives markets.
It is therefore an object of the present invention to provide an improved electronic trading system for trading derivative fmancial instruments.
It is another object to the present invention to provide anonymous credit-based trading of financial instruments.
It is another object to the present invention to provide substantially real-time status information for selectable markets.
It is another object to the present invention to provide flexible control of outstanding and executed orders within an electronic trading system.
It is an object of the present invention to allow users of an electronic trading system to place passive orders and active orders.
It is an object of the present invention to provide electronic means which enable traders to communicate or broadcast interest in a specific fmancial instrument anonymously to other traders who may respond with a request to trade.
These and other objects of the present invention are provided for by systems, methods, and computer program products that provide for electronic trading based on the client/server model, including a central processing center (i.e., server) having multiple server modules and a plurality of individual trader workstations (i.e., clients), all of which are operationally interconnected, preferably via an Internet-protocol network. Because of the open architecture of the system, it is possible that the system may run within the context of an Internet browser on a user""s existing desktop computer. At the user""s workstation, the user may select from a variety of different interfaces that enable the user to follow markets, enter and execute trades, and monitor outstanding and historical orders and executions. Thus, the user is provided an in-depth view of the market and essentially complete control over the order load process.
The market information provided to the user is coded with credit preference data generated by referencing the complex credit preferences inputted by each user regarding all possible counterparties. Thus, potential counterparties are then able to identify which orders they are eligible to trade based upon the coded credit preference data. The user is also provided with a feature whereby the user can input an interest reset risks portfolio into the system and then view his/her interest rate reset risk position relative to other counterparties that have inputted their respective interest rate reset risks portfolios in order to determine possible offsetting positions. The user is also provided with a facility for placing orders for various financial instruments via an auction process whereby the system automatically matches all orders and determines the prices and quantities executed based on several guidelines including user credit preferences. In addition, the user is provided with a switch auction facility whereby the user can use the auction process to trade forward rate agreement (FRA) switches with other counterparties utilizing the same credit preference screening.
At the central processing center, multiple server modules operate simultaneously to perform various functions such as delivery of market information to the user, credit preference verification of a requested trade, execution of trades, term negotiation, acknowledgments, position discovery, and auction execution. The central processing center also includes a database which provides persistent storage of information such as historical data, instrument definitions, user credit preferences, user and business unit data, and historical market data.
At the trader workstations, multiple software modules operate simultaneously to perform various functions at the front end of the system such as providing user interfaces, performing credit preference verification, and receiving inputted user data such as trade data and credit preferences. The trader workstations are preferably implemented on desktop computers of the users via an Internet browser program, and therefore, do not require dedicated terminals on the users"" desktops. The communication between the trader workstations and the central processing center is preferably based on Internet Protocol (IP), and operates over the Internet in a secure mode.
In accordance with an embodiment of the present invention, a system for facilitating derivative trading comprises a communication network interconnecting a first user and a second user to a central processing center, and a market inventory module associated with the central processing center that provides the first and second users with essentially real-time order information regarding more than one financial instrument, wherein the order information includes requests to buy financial instruments and requests to sell financial instruments. In addition, the system may include a trader module associated with each of the first and second users for receiving the real-time order information from the central processing center and for presenting the real-time order information to the first or second users according to respective user customized profiles. The system may further include a credit preference module associated with each of the first or second users, wherein the credit preference modules indicate the trade eligibility of the respective first and second users for each request to buy or sell. In addition, the system may comprise an execution module associated with the central processing center that processes a trade initiated by one of either the first or second users which desires to trade on an order posted in the order information by the other of the first and second users. In essence, the execution module processes the term negotiations and will-do-more services. In addition, the system may comprise a settlement module associated with the central processing center for processing transactions and generating confirmation notices, which are submitted to both parties. The settlement module also calculates the commission fees.
The credit preference module described above may determine the trade eligibility based on credit preferences of both the first and second users. This system may further include a switch module that receives interest rate swap positions from the first and second users, and determines relative position information for the first and second users.
In accordance with another embodiment of the present invention, a system for facilitating derivative trading, wherein the system includes a plurality of interconnected user nodes configured to exchange order information via a central processing center. The central processing center may comprise a first user node including a trader module that receives real-time order information and presents the real-time order information to a user according to the customized profiles defmed by a first user, a credit preference module that includes credit preference data inputted by the first user for use in determining trade eligibility of trades proposed in the real-time order information with a second user, and an interface to a communications network that interconnects the plurality of user nodes. Each user node may further include a switch module that receives interest rate swap positions from the first user and the second user, and that determines relative position information for the first user.
In accordance with yet another embodiment of the present invention, a system for facilitating derivative trading, wherein such system includes a plurality of interconnected first and second users that exchange order information, and wherein each of the first and second users are connected to a central processing center. The central processing center may comprise a group server that provides the first and second users with essentially real-time order information regarding more than one financial instrument. The order information preferably includes requests to buy financial instruments and requests to sell financial instruments. The central processing center may further comprise an execution module that can process a trade initiated by one of either the first and second users which desires to trade on an order proposed in the order information by the other of the first and second users. This central processing center may further include an interface to a communications network that interconnects the plurality of first and second users to the central processing center.
Other features and advantages of the present invention will become apparent to one that is skilled in the art upon examination of the following drawings and detailed description. It is intended that all such additional features and advantages be included herein within the scope of the present invention, as defined in the appended claims. Further, it will be appreciated by those of skill in the art that the above-described systems of the present invention may be provided as methods or computer readable program means.